This study investigated children living in foster homes, a type of child welfare institution, in Japan. Foster care provides a home environment to children who have been abused and/or neglected by parents who have parenting difficulties. Approximately 12.3% of children living in foster homes in Japan have a parent with mental illness, but despite growing concern, the psychological impact of having a parent with mental illness among foster children is currently not known. In this study, we conducted a follow-up survey of 97 children aged 3–18 years who lived in foster homes and analyzed open-ended survey questions. The major finding was that 35% of the children had a parent with mental illness. Analysis also extracted six psychological impacts of having a parent with mental illness: anxiety/confusion, repressed emotion, distorted image of parents, imitation of parents, parentification, and other. Even after having been separated from their parents and admitted to foster homes, children were disturbed and confused because of the adverse effect of their parents. These findings suggest the importance of providing psychological care for emotional support of foster children struggling with their relationship with their parents.